Even though legacy venture capital firms are still raising bigger and bigger funds, they may have more luck focusing on the small stuff.
A general partner at an Israel based fund thinks so. Last year he noticed more and more tiny funds getting on the cap tables of competitive deals, and he wasn't used to it. He thought it would be worth figuring out a way to back these funds.
How can we get exposure to that space? They invest a small amount in order to get access to the most oversubscribed rounds. Everyone wants you because you are bringing a lot of value.
Sweetwood decided to create a fund for these investors. The firm raised $20 million for a separate fund to cut checks of up to $2 million into funds with a focus on funds in Israel. Seven funds have been supported by Sweetwood so far.
It is looking to work with angel investors.
Sweetwood will work with angels to match their investment into a company and give them carry on the money that the firm puts in. They don't take that type of stake to start with, because it would mean a hit to the firm's potential returns. Two deals have been closed so far.
The approach to angel investors is a no-brainer for these guys. There is an external partner that doesn't look like a tech scout but pays them as tech scouts.
The firm started raising the fund in the peak of the craziness and is now looking to deploy into very different market conditions where smaller and less established firms are struggling to raise. When the market conditions began to sour, they got over that fear because they realized that the funds they back will now be writing checks to companies at more reasonable valuations and will have time to spend on due diligence.
The big question when evaluating these potential investments is, "Why do startups want to take their money?" since neither angel investor nor nano funds are big enough to lead any of the rounds they are in. He said that the firm is looking for funds and individuals that are experts in their field.
Angel investor access is king for some. If you are a notable former tech entrepreneur that is well connected, the idea is that you will just hear about more notable deals and be invited to participate over other angels. There can be angels that are successful or well known.
Sweetwood is looking for funds and individuals with expertise and specialization that are going to be sought out by companies to fill out rounds because they bring an outsized value add to the table.
People are giving you access. He asked why people wanted him on the cap table. The value add and ability to gain access to the deals are more important than the ability to distinguish the deals.
Some of the funds will grow up to be good candidates for the flagship fund in the future. They will be able to get into companies earlier that could end up in the flagship fund portfolios.
The funds that are small tend to do better than larger ones. The smaller you are, the more likely you are to make a lot of money. I wondered how we could make something for this.
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